Sunday, December 10, 2017
Business

Incapital CEO taps ex-Raymond James brokers to build Tampa Bay presence

John Radtke may not have achieved his boyhood dream of playing centerfield for the New York Yankees, trading his ball-playing days at Michigan State University for the world of corporate finance. But he still has a direct pipeline to America's pastime.

As CEO of Boca Raton-based Incapital, Radtke's day job is giving investors easy access to buying corporate bonds and other fixed-income financial products. Incapital chairman Tom Ricketts, who lured Radtke to join him in 2005, may be best known for becoming chairman of the Chicago Cubs four years ago after leading his family's acquisition of the team.

"We drew straws. He took the baseball team," Radtke said with a laugh. "But we're probably two of the luckiest guys in the world. We've had a great deal of fun and certainly, I think, made our mark on the industry."

These days, Incapital has its sights set on growth. It's expanding in Canada while ramping up a Tampa Bay office, seizing on a talent pool of surplus Raymond James Financial brokers after the St. Petersburg firm's merger with Morgan Keegan. Currently, Incapital has four employees in its St. Petersburg office. Throughout all its markets, it intends to add more than 20 people, bringing it close to 200 employees.

The Tampa Bay Times talked with Radtke, 49, last week about bonds, baseball and big opportunities to bring on bay area brokers.

What does Incapital do?

The company started in 1999. It's primary focus was on corporate bonds and creating a level playing field for the retail investor. Corporate bonds had traditionally been an institutional product.

As a company, we act as the grand wholesaler or distributor in the scheme of things.

We work through approximately 750 different dealers serving retail investors as well as banks and institutional clients. There's a financial intermediary between all of our transactions. We created a system that allows the likes of General Electric to access their retail customers (who want to buy corporate bonds) in a matter of moments.

That didn't exist before?

It was a highly institutional world. Someone like a Merrill Lynch or maybe a Smith Barney would create a syndicate and the deal would be somewhat larger and generally more institutional in the pricing.

Needless to say, the retail customer never really had access.

What happened with Incapital's involvement?

The demand was incredible. The first trade that we did brought in more than $250 million in orders. … We proved there was an enormous amount of money that went untapped. That opened a platform that allowed the retail broker to really sell it. It really does level the playing field for a true, fixed-income buyer.

Why did you expand into Tampa Bay?

With Tampa, it was an interesting opportunity for us. We were already married to the state of Florida at the time of the Morgan Keegan and Raymond James merger. We already did business with Raymond James and Morgan Keegan on the fixed income side.

It was also a way for us to provide maybe a little bit of relief for people (who lost their jobs) as a result of that merger. For us, location wasn't as significant as hiring good people.

We talked to principals at Raymond James, (asking) if there was anyone they thought was really good. They didn't get rid of bad people; there was just a bit of overlap.

We've hired six or seven. If we found four or five more traders that fit our mold, we'd hire them as well.

Doesn't Raymond James view you as competition?

They might, but it's interesting in our business. I call Raymond James a trading partner. There's competition, but it's also about relationships. I think the people at Raymond James were relieved that some of their friends could find jobs.

So you still partner with them?

Absolutely. All day long. On the retail side, we do a substantial amount of business with them.

What's your total volume of business?

Our high-water mark was $90 billion of securities that flowed through. This year it will probably be closer to 70 (billion dollars). We're off about 30 percent.

Why the dropoff?

It's been two or three years of 1 percent interest rates. Alternative investments are more attractive. There are also problems in Europe that have had an impact on credit issues, but by and large it's been low interest rates. Most of the people we service are content in low-yield, but safe, fixed income until they have a sense of normalcy.

And the need for corporate bonds is off?

Most banks are flush with cash so there is not a robust need. So yields have been even lower than they would have been in a comparable market at the bank level.

Some clients we serve would like to have access to higher yields … so we have structured CDs. It's like putting a toe in the water instead of the whole foot.

How does your advice and business model change if we enter an age of rising interest rates?

It changes in a pretty positive way. It's painful, initially. Anyone sitting on inventory (of bonds) has to mark it down. Most dealers are showing a 30 to 40 percent loss in fixed income. We'll have a couple months where it's painful … but it will allow us to sell coupons or products that are higher in return.

In a low-interest environment, people have a tendency to reach for yield, and when they reach for yield, they buy all the wrong product.

As inflation creeps in and it pushes interest rates up … what exacerbates is the 70-year-old who says, "I can't live on 1 percent (return). I need 3 or 4."

But higher interest rates can make bonds more appealing?

For us seeing interest rates rise, it's good. Business will pick up. Selling 4 or 5 percent (returns) when it's been 1 percent over the last three or four years (is) something that's a bit more normal.

With these baby boomers (aging), there's an enormous group of people getting to an agent and shifting their investments into fixed incomes. One thing we promote here are bond ladders.

How do bond ladders work?

Say we're talking about $100,000. We'd promote that they buy buckets of $20,000 (with maturity dates spread over) 10 years. Then they could reinvest (in buying bonds) at slightly higher rates. Every year, they'd have an opportunity to reinvest at slightly higher rates. Instead of putting all your money in a 10-year security to achieve maximum yield, it keeps giving you an opportunity to reinvest cash in what's a slightly higher environment. It's something we promote, especially in a market we feel is under pressure to go higher.

Jeff Harrington can be reached at [email protected] or (727) 893-8242.

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